All in all, it was a pretty good quarter for Google parent Alphabet (GOOG 0.36%) (GOOGL 0.29%). Revenue was up 7%, driving a 12% year-over-year improvement in operating income. Its search-based advertising business is bouncing back from a recent bout with economic headwinds.
Where the company was most impressive for the three-month stretch ending in June, however, wasn't in ad sales. Its cloud computing arm is firing on all cylinders now and is doing well enough that Alphabet stock is a buy for anyone on the fence about owning it.
Google Cloud moves deeper into the black
During its second fiscal quarter of the year, Alphabet turned $74.6 billion worth of sales into an adjusted profit of $1.44 per share. Those figures topped analysts' expectations for revenue of $72.8 billion and earnings of $1.34 per share. And that 7% year-over-year sales improvement (9% on a constant-currency basis) led to 19% growth in per-share profits.
The most compelling aspect of the company's second-quarter numbers, however, isn't the top or bottom line. Alphabet's cloud computing arm, Google Cloud, is knocking it out of the park, registering its second (and growing) straight quarter of operating profit.
The graphic below shows that after several quarters of progress, Google's cloud business swung to a profit in the first quarter this year, and then widened that profit on continued revenue growth in the following quarter. Given this trajectory, there's good reason to expect more such growth.
Data source: Alphabet. Chart by author. Dollar figures are in billions.
And this is no small matter. Although it's not a major breadwinner for Alphabet just yet, cloud computing is a business that scaled up very profitably for rival and market leader Amazon. Its Amazon Web Services' gross margins are holding at 28% of revenue.
Presuming Alphabet will eventually match that margin, its cloud profits could dramatically accelerate from here. For example, 28% of Alphabet's second-quarter cloud revenue of $8 billion would be a little over $2.2 billion. That's far more than the operating income of just under $400 million Google Cloud actually booked during the second quarter.
For a little more perspective, Alphabet's total second-quarter net income was $18.4 billion. So just a bit more scale from Google Cloud could prove to be a huge boost for Alphabet's bottom line.
Alphabet's core business is firming up again
The cloud business is finally coming into its own at the same time we're seeing much-needed recovery in other fronts for the company.
The past few quarters haven't exactly been stellar for Alphabet. Broad economic weakness has crimped demand for web ads, as has Amazon's -- and others' -- foray into the digital advertising business.
Alphabet's fourth-quarter revenue growth of only 1% year over year (and only 7% on a constant-currency basis) was anemic. The operating profit margin's contraction to only 24% of revenue for the same quarter is also subpar. Things didn't improve in the first quarter, either.
Given last quarter's figures, though, it's not a stretch to suggest the company is past the worst of any headwind. Year-over-year revenue growth of 9% is a marked improvement on the top line's recent sluggish growth. Better still, the second quarter's operating margin of 29% is the strongest since early last year. Net income margins and per-share profits are growing at a similarly reaccelerated pace.
Data source: Alphabet. Chart by author. Dollar figures are in billions.
None of this fiscal recovery should come as a surprise. CEO Sundar Pichai imposed aggressive cost cuts beginning in the latter part of 2022, at the same time as he tightened the company's focus on its highest-payoff projects. The stated point of the so-called Simplicity Sprint began in August of last year was to "get better results faster." And it's starting to work in earnest.
More importantly, the initiative can continue gaining traction. While analysts still believe companywide revenue will fall this year, these same analysts are looking for nearly 17% EPS growth next year on sales growth of nearly 11%. That's solid for a company of Alphabet's size.
Time to buy
Most important to investors is that it's all a reason to step into Alphabet shares. Despite Wednesday's big earnings-driven jump, shares are still down 14% from their 2021 peak.
Investors seem to fear the company wouldn't be able to do exactly what it's now doing: recovering from a post-pandemic economic lull, while keeping its fair share of the web advertising market against more viable competition than there was before the pandemic. Its newfound cloud computing profits and potential growth simply solidify the bullish argument.
